Unit 2b Saving

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  • 1. GENC3003Personal Financial Planning
    Andrew Hingstonandrew.hingston@unsw.edu.au
    Unit 2: Savings and Smart Buying
  • 2. 2
    What are some ways to cut back in expenses while at university in order to save more?
  • 3. 3
    Saving versus deferred spending
    “I’m saving to go on a holiday”
    This is just a “delay” in spending money!
    Real saving = never plan to spend the money
    Let’s call this real savings your “investment capital”
    The goal is to never spend your investment capital
    Investment capital generates returns
    Invest in property = generates rental income
    Invest in shares = generates dividend income
    Spend the returns … not the investment capital!
  • 4. 4
    Why is saving important?
    Regular saving = behaviour = become wealthy
    Overspending = behaviour = poverty or financial stress
    Income comes from two sources
    You working and earning a salary
    Your investments working and earning returns
    … so increased savings = increased income
    Savings required to buy a house
    Savings required to start investment portfolio
    Savings buffer of $10,000 = peace of mind!
    Savings cover large unexpected expenses
  • 5. 5
    Where do savings come from?
    Savings =
    Total income (salary and investment income)
    Less tax
    Less rent or interest on mortgage payments
    Less living expenses
    Increase savings by:
    Increase salary
    Increase investment income
    Reduce tax
    Appropriate housing strategies
    Reducing living expenses
  • 6. 6
    How to save more?
    Stop spending 110% of income!
    Reduce expenses by 10% or more
    Relearn what is a “need” versus a “want”
    Learn “contentment”
    Learn the “behaviour” of always savings
    Then …
    work at increasing your salary
    increase your investment portfolio
    develop some good long-term strategies
  • 7. 7
    Is this real long-term saving?
    Money left in a transaction account – NO
    Probably not if it is going to be spent next month!
    Money in high-interest savings account – YES
    Mortgage payments – NO
    Most of mortgage payment is actually interest
    Only payment less interest is saving (10% at start of loan)
    Superannuation put in by employer – YES
    Saving for holiday – NO (deferred spending)
    Saving for car – NO (car goes down in value)
    Saving for anything that goes down in value – NOT saving!
  • 8. 8
    Setting goals
    Easier to save if you have some goals
    Visualising goal makes it easier to forgo spending now
    … in exchange for future future happiness
    Examples of goals:
    New car for $12,000 by 30 June 200X (really deferred spending)
    Holiday $5,000 on 5 Jan 200X (really deferred spending)
    Deposit on first house $30,000 by 31 Dec 201X (real saving)
  • 9. 9
    How much to save
    Work out how much goal will cost – Eg $12,000
    Work out when you want it = 5 years
    Calculate number of months = 5 x 12 = 60
    Divide amount by number of months = $200
    You need to save $200 per month
    Yes, you will receive interest on these savings
    But it will cover you for the fact that most people under-estimate the total cost!
    To work it out exactly, use =PMT( ) function in Excel
  • 10. 10
    Saving tips
    Save little, save often
    Keep spare coins in jar and deposit in bank each month
    Direct debit $X per month into a separate account
    Make sure you are receiving good interest
    ING Direct Savings Maximiser pays high interest
    Compound interest means savings grow exponentially
    “But I’m a student”
    Start a good saving behaviour with $50 per month.
    Live like a student for 2 years after graduating!
  • 11. 11
    Don’t treat shopping as a “hobby”
    Don’t buy unless you have the money to do so
    Pay with cash (it feels more expensive than cards)
    Shop around and wait for the sales
    Substitute water for coffee and BYO
    Make your lunch to uni/work
    Shop at Aldi rather than Coles / Woolies / 7-Eleven
    Buy second-hand on Ebay – then sell it again!
    Give up on smoking, gambling and binge drinking
  • 12. 12
    Delay buying something for two weeks
    Often after some time you realise you can do without
    Try classical conditioning
    Say out loud 10 times …
    “I cannot afford this now … I need to save money instead”
    Track your expenses to keep you accountable
    Putting things into a spreadsheet is a hassle
    Creates a disincentive for small purchases
    Spreadsheet keeps you accountable each month
  • 13. 13
    Cut up credit card if you can’t pay full balance
    Stay away from buying “Interest free”
    Personal loans – for people who can’t save
    Don’t let your parents borrow against the house
    Home loan rate is much lower than personal loan rate
    But term on a home loan (25+ years) is much longer than a personal loan (2-5 years)
    End up paying a lot more interest
    Unless disciplined enough to make extra home loan payments
  • 14. 14
    What if I’ve got credit card debt?
    Recognise you may have a serious behavioural problem
    UNSW COMPAS Counselling Service (Free)
    Wesley Mission Financial Counselling Helpline (Free)
    Phone 1800 808 488
    Most important steps:
    Realise that you have a problem
    Talk to your bank – banks hate zero communication!
    Move your credit card debt into a personal loan with bank
    Cut up your credit card and pay off personal loan
  • 15. Stop and read
    Now read:
    Chapter 3
    Saving Faster
    Chapter 4
    Smart Buying and Credit